Reauthorization of the Higher Education Act
Vice President Gore today will announce an Administration proposal to go forward with a scheduled 10% reduction in the interest rate on student loans while making improvements in the program so that banks can continue to participate in the program. The lower rate--due to take effect on July l --has been criticized by banks who say it is not profitable enough. But a Treasury Department analysis (portable document format) indicates that Congress could address the lenders' concerns "at little or no net cost to students."
Students will Save Hundreds of Dollars with the Interest Rate Cut. Under reforms enacted in the 1993 budget deal, the interest rate on student loans will drop by an estimated 10% on July l, 1998, reducing the rate that students are projected to pay on loans from an average of 7.8% over the next five years to 7.0%. This saves borrowers hundreds of dollars in interest. For example:
Student Access to loans will be Maintained. The Administration is proposing changes that will help make student loans sufficiently profitable, so that lenders can continue to make loans to students and their families. The Administration is proposing to eliminate unnecessary costs to lenders by changing the formula for setting the interest rate so that it more closely tracks lenders' own financing practices. This makes a lower rate possible for student borrowers.
|Instrument used for setting rate||Increment during in-school period||Increment in repayment||Projected Interest Rate (5-year weighted avg)|
|July 1 |
|10-20 yr note||+1.0||+1.0||7.0%|
Modernizing Loan Program Will Enhance Lender Profitability. The Administration's proposal for reauthorizing the Higher Education Act would streamline the student loan system so that it can take better advantage of competition and technology. This would make the structure of the government-guaranteed loan program simpler and more efficient, further reducing lender costs, and allowing for lower student loan origination fees, saving borrowers $3 billion over five years. The Administration is also pursuing other methods of improving lender profitability, such as reducing regulatory burdens, and using an instrument to set the interest rate that may be even more efficient for lenders than the T-bill.
Treasury Department Report Shows that Lender Concerns Can Be Addressed. From the Treasury Department's analysis and other input, the Administration has concluded that while implementation of the July 1 rate probably would not present an immediate crisis, it does pose a long-term problem for lenders, and it would be best to make a change before the new rate takes effect. Linking the interest rate to the T-bill as the Administration is proposing "would maintain bank participation in the government-guaranteed student loan program at little or no net cost to student," according to the Treasury study.